The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We fi rst show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is  rm-speci c and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary e¤ects on investment. Even if this result emerges in both the  rm-speci c and rental capital speci cations, only with the former the estimated average price duration is in line with microeconometric evidence. In the  rm-speci c capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which  rms change their prices.